Transfer Pricing Becomes Key Tax Issue For Authorities And Multinationals

by Jason Gorringe, Tax-News.com, London

17 November 2005

As national governments strive to extract what they perceive to be their fair share of revenues from multinational companies, a new survey by Ernst & Young, the professional services firm, has found that companies' transfer pricing policies are coming under increasing levels of scrutiny from tax authorities.

Ernst & Young's survey of 476 companies in 22 countries, which was reported in the Financial Times, found that almost two-thirds had been the subject of transfer pricing probes over the last three years, with 40% of the respondents reporting that reviews had led to a readjustment by the authorities of the amount of tax owed.

With intra-company transactions said to account for more than half of world trade, the survey results showed that national tax collectors are not only concerned that multinationals may be using transfer pricing to shift profits from high tax to low tax jurisdictions, but are also arguing with each other over the territory in which a firm's profits are taxable, leaving many firms "caught in middle".

As a result, Ernst & Young said that transfer pricing is now considered the most important tax issue facing multinationals, especially in the pharmaceutical sector, where four-fifths of firms expect to suffer double taxation.

However, the report also noted that a company's transfer pricing policy can make a substantial contribution to its bottom line, and 29% of those polled stated that transfer pricing strategies are increasingly being used in place of more traditional tax planning strategies.

“Transfer pricing is increasingly perceived as less of a compliance issue and more of a planning issue that contributes values,” the report stated.

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